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Social Security Beneficiaries Can Avoid Tax Consequences

For Social Security beneficiaries who find that they will likely have to pay taxes on their benefits, there are a couple of strategies that they can pursue to avoid or lessen the tax hit they will take on their federal benefits.

Beneficiaries should look closely at what types of income are pushing their combined income over the limit at which they have to start paying taxes on their benefits. For instance, some beneficiaries may have investments paying cash or dividends that add to each year’s total income. They can move these investments into tax-free or tax-deferred accounts like an individual retirement account (“IRA”). Other investments like annuities also push tax liabilities into the future and avoid having investments count as present day income. Financial planners and tax experts can help beneficiaries make the best decisions when it comes to taxes and their Social Security benefits.

Similarly, beneficiaries can use money in accounts that generate interest (savings accounts, for example) to make retirement contributions or payoff mortgages. This lowers the amount of money that is generating interest and, thus, the total income.

In addition to the immediate tax savings, these strategies have the added benefit of helping beneficiaries improve their financial footing when it comes to retirement. Have you made any financial moves to avoid taxes on Social Security benefits?